Insurance Glossary Life Only

Transcription

1 Insurance Glossary Life Only Absolute Assignment: A transfer by the policyholder of all control and rights to a third party. Accumulation at Interest Option: A dividend or settlement option under which the policyholder allows his dividends or policy proceeds to accumulate interest with the company. Although the dividends or proceeds are not generally taxable, the interest earned is. Actuary: One concerned with the application of probability and statistical theory to insurance, utilizing the law of large numbers. ADB: Accidental Death Benefit (also known as Double Indemnity). A rider added to a Life policy that will pay double the face amount if the insured dies as a result of accident, generally within 90 days of the accident. Adverse Selection: Selection not in favor of the company. The tendency of poorer risks to want insurance more often than standard risks. For example, a person who is already sick would like to buy health insurance. Adverse Underwriting Decisions, Consumer Rights: Under the Fair Credit Reporting Act, when an adverse underwriting decision is made, the insurer must provide the applicant or policyholder with specific written reasons for the decision, or advise the individual that specific reasons are available upon written request. Upon receipt of the written request, the insurer must furnish specific reasons for the adverse decision and the names and addresses of the sources that provided the information. Agent / Producer: The individual appointed by an insurance company to solicit and negotiate insurance contracts on its behalf. Agents or Producers represent the company, not the client. Alien Company: An insurer organized and domiciled in a country other than the United States. Annuitant: The party receiving the benefits of an annuity, similar to the insured on an insurance policy. The annuitant usually also owns the annuity, although you can buy an annuity to benefit another party, who would then be the annuitant. Annuity: An agreement by an insurer to make periodic payments that continue during the lifetime of the annuitant(s) or for a specified period. Annuities are considered to be the opposite of life insurance, since annuities pay while your alive and life insurance pays when you die. Life insurance proceeds create an estate, while annuities are used to liquidate an estate over a period of time. All annuities are insurance products and a life insurance license is required. Applicant: The party making application to the insurance company for the policy. Applicants must provide the insurer with the truth to the best of their knowledge, which is known as a representation. Application: A form on which the prospective insured states facts requested by the insurer and on the basis of which (together with any information from medical examiners, attending physicians, hospitals, 1

2 investigators, and the producer) the insurer decides whether or not to accept the risk, modify the coverage offered, or decline the risk. With premium, the application is considered to be an offer to buy. If attached to the policy at issue, it becomes part of the Entire Contract. Assignee: The person to whom policy rights are assigned in whole or in part by the policyholder, who is known as the Assignor. On Life insurance there are 2 types of assignment: Absolute and Collateral. Assignment: Transfer of rights in a policy to another party by the policyholder. For example, if you bought a life insurance policy on a minor child, you are the owner and the child is the insured. When the child reaches age 21, you could assign all rights of ownership in the policy to the child. This is an absolute assignment. Attained Age: The present or current age of the insured. Upon conversion, premiums are based on the current age of the insured. Authorized Company: An insurer permitted to sell insurance within a state. Must obtain a Certificate of Authority from the Commissioner or Director of Insurance of every state they sell in. Automatic Premium Loan: A rider in a Life policy authorizing the insurance company to use the cash value to pay premiums not paid by the end of the grace period. May be present in Whole Life or Endowment policies only, never Term. This rider is free, but must be selected by the policy owner. Aviation Clause: Limits or excludes coverage when the insured is participating in specified types of air travel. Coverage is usually confined to regularly scheduled flights of commercial airlines. Often applies to student pilots. Beneficiary: A person who may become eligible to receive, or is receiving, benefits under an insurance plan. The beneficiary is selected by the policy owner and may be changed at any time, unless irrevocable. Brokerage: A Producer who represents an insured in the solicitation, negotiation, or procurement of contracts of insurance. For example, you might represent only one insurer as a Producer. If that insurer declines to write coverage for your client, you might try to broker the business elsewhere in an effort to better serve your customer. Business Insurance: Life or Health insurance written to cover business situations such as key person, sole proprietor, partnership, corporations, etc. Cash Dividend Option: A dividend option under which the policyholder receives the dividends in cash. Not subject to tax. Mutual insurers issue participating policies, which might pay dividends, but they are not guaranteed. Cash Surrender Value: The accumulated, guaranteed cash value in a Whole Life or Endowment policy at any given point in time. Most contracts do not develop a cash value until after the 3 rd year. On Whole Life, the cash value will equal the face amount of the policy at age 100. Synonymous with Cash Value. Certificate: A statement evidencing that a policy has been written and stating the coverage in general. On Group insurance, the employer receives the master policy and the employees receive Certificates of Insurance. Claim: A demand for payment under the insurance policy. 2

3 Life & Health Insurance Glossary Classification: The grouping of persons for the purpose of determining an underwriting or rating group into which a particular risk must be placed. For example, on Whole Life, the standard rate for the average person at age 30 might be $10 per $1,000 of face amount. If the insured is sub-standard, the rate will be higher. A Preferred risk receives a discount from the standard rate. Collateral Assignment: Assignment of part of the proceeds of an insurance policy to a bank as collateral to settle the loan balance that may exist at the insured s death. Common Disaster Provision: A provision in a Life contract that provides that the Primary Beneficiary must outlive the insured by a specified period of time in order to receive the proceeds. If not, then the Contingent Beneficiary receives the proceeds. The provision is designed to protect the rights of the Contingent Beneficiary in the event of simultaneous (or nearly simultaneous) death of the insured and the Primary Beneficiary. The time limit is usually 10, 15, or 30 days, depending on state law. Also known as the Uniform Simultaneous Death law. Concealment: The deliberate withholding of facts by an applicant for insurance that materially affects an insurance risk or loss. Conditional Receipt: In Life and Health insurance, a Conditional Receipt provides that if premium accompanies the application, coverage shall be in force from the date of application (whether the policy has yet been issued or not) provided the insurance company would have issued the coverage on the basis of facts as revealed by the application and other usual sources of underwriting information. Remember, there is never any coverage unless the premium has been paid! Conditions: The part of an insurance contract setting out the responsibilities of both the Insured and the Insurer, such as the requirements regarding Notice of Claim and Proof of Loss. Consideration: The exchange of value on which a contract is based. In Life and Health insurance, the Consideration is the premium and the statements in the application. Remember, consideration need not be equal. You might pay $1,000 in premium, but your policy will pay $100,000 if you die. Consideration Clause: A clause in a Life policy specifying the premium due for the insurance protection and the frequency of payment (also called Mode). The more frequent the Mode of Payment, the higher the cost, since most insurers charge service fees for budget payments. The cheapest Mode is annual. Contingent Beneficiary: Person or persons named to receive benefits if the Primary Beneficiary is not alive when the insured dies. For example, the Primary Beneficiary might be your spouse and the Contingent Beneficiary might be your children. Contract: A legal agreement between two parties for consideration, such as an insurance policy. To hold up in court, contracts must contain 4 required elements: Consideration, Offer, Acceptance and Legal Purpose (remember the acronym COAL). Parties to the contract must also have Legal Capacity. Contributory Group: Group insurance for which the employees pay part of the premium. If the group is contributory, at least 75% of those eligible must enroll in order to prevent adverse selection. In noncontributory groups, 100% must enroll. Controlled Business: Life-insurance coverage written on the producer's own life and on the lives of such persons as the producer s relatives and business associates. The amount of controlled business a producer may write is restricted in most states, often to a maximum of 50% in a 12 month period. 3

4 Convertible Term Insurance: A Term Life policy that can be converted any time to a permanent type of coverage without proof of insurability. Conversion premiums are based on current age and coverage cannot be increased. Most Term is convertible, but not all. Most Group insurance (which is usually Annual Renewable Term) is convertible by law during its 31 day grace period. Credit Insurance: Insurance on a debtor in favor of a lender, intended to pay off a loan or the balance due thereon if the insured dies or is disabled. Credit Life is a type of decreasing term insurance and the face amount of the policy is limited to the amount of the loan. Generally not used as Mortgage Protection Insurance. Death Benefit: The policy proceeds to be paid upon the death of the insured. On Life insurance, proceeds are not taxable, but may be included in the value of the insured s estate for estate tax purposes. Deductible: Dollars or percentage of expense that will not be reimbursed by the insurer. The purpose of the deductible is to hold down the cost of insurance. The higher the deductible, the lower the premium. Decreasing Term Insurance: Term insurance whose amount of coverage starts out at the full amount, then gradually decreases until the expiration date of the policy. Generally, the cheapest type of Life insurance, but it has no cash value and cannot be renewed. Often used as Mortgage Protection insurance. Deferred Annuity: An Annuity on which payments to the annuitant are delayed until a specified future date. May be purchased with a single premium (a SPDA) or with flexible premiums. Interest earned during the accumulation (or pay in) period is tax deferred until withdrawal, when amounts above the annuitant s invested capital (or cost basis) are taxed as ordinary income. Direct Writer: An insurance company that sells its policies through licensed producers who represent the insurer exclusively, rather than through independent local producers, who represent several insurance companies. Direct writing producers are also called Exclusive or captive producers. Dividend: The return of part of the premium paid for a Participating policy issued by a mutual insurer. It is unlawful to guarantee future dividends, but Producers may refer to the insurer s past dividend payment history, if accurate. Mutual dividends are not taxable. However, dividends paid to stockholders of a stock insurer are taxable, since stock companies issue non-participating policies. Dividend Options: If a Mutual insurer declares a dividend, the policyholder has a choice of 5 dividend options, which can be changed at any time, including: Cash, Interest, Applied to Premium When Due, Paid Up Additions, or 1 year Term insurance. Domestic Insurance Company: An insurance company formed under the laws of the state in which the insurance is written. Earned Premium: That portion of the premium for which policy protection has already been given. For example, if you buy a 1 year Health policy for a premium of $1,200 and the insurer cancels you exactly 6 months later, they are entitled to keep $600 (the earned premium), but they must also refund you $600, which is called the unearned premium. If they covered you for the entire year, all the premium would be earned. This concept also applies to P&C insurance, but not to Life insurance, where all premiums are considered to be fully earned upon payment. Effective Date: The date on which an insurance policy goes into effect and from which protection is furnished. 4

5 Life & Health Insurance Glossary Eligibility Period: The period during which the employee is eligible to obtain coverage under a Group Life or Health plan. Also known as the open enrollment period. Endorsement: A form attached to an insurance P&C policy changing the contract. Endorsements are called riders in Life and Health insurance. No change to a policy may become effective until approved by a company officer. Endowment Policy: A cash value life policy for which premiums are paid for a limited number of years, such as to age 65. If the insured is alive at the end of this premium-paying period, she receives the face amount of the policy. If the insured dies before maturity of the policy, the beneficiary receives the proceeds. Generally the most expensive type of cash value life insurance, since the policy reaches maturity prior to age 100. Endowments are often purchased to supplement retirement or for children s educational purposes. Exclusions: Causes or conditions listed in the policy that are not covered and for which no benefits are payable. For example, in most states, suicide is excluded on a Life policy for the first 2 years. On Health insurance, intentional self inflicted injury is never covered. Experience: The loss record of an insured, a class of coverage, or an insurance company. For example, most large Group Life policies are rated based on the prior claims history of the group, which is called experience rating. Extended Term Option: A life-insurance non-forfeiture option under which the insured uses the policy s cash-value to purchase one-year Term insurance in an amount equal to the original policy face amount. Although the policy holder could select the Extended Term Option at any time, if the policy lapses and no other non-forfeiture option has been selected, the policy will automatically go into Extended Term. Remember, there are 3 non-forfeiture options: Cash Surrender, Reduced Paid Up and Extended Term. Face Amount: The amount indicated on the face of a Life policy that will be paid at death or when a Whole Life policy matures at age 100. Also known as the Death Benefit or the policy limit. Not taxable. Family Income Rider: Added to a Whole Life policy for an additional premium, this rider is similar to the Decreasing Term Rider except that payments to the beneficiary are in the form of monthly income rather than a lump sum. For example, if you added a 10 year $100,000 FIR to your policy and died 5 years later, your family would receive $10,000 a year for 5 years PLUS the face amount of your Whole Life policy. Remember, the rider is term insurance and you must die in the term. If you died after 11 years, the rider would not cover, but the Whole Life would, since Whole Life is permanent insurance, covering to age 100. Family Plan Policy: A combination plan covering your entire family, usually with Permanent insurance on the father's life, with mother and children automatically covered for lesser amounts (usually Term), all included under one premium. Fiduciary: A person who occupies a position of special trust and confidence when handling premiums on behalf of insureds and insurers. Insurance producers are considered to be fiduciaries. Fixed Amount Option: A Life insurance Settlement option under which the beneficiary receives a fixed amount (such as $500 a month) for an unspecified period of time. Payments continue until the principal and interest are depleted. 5

6 Fixed Period Option: A Life insurance Settlement option under which the beneficiary receives a regular income for a specified period of time, such as 10 years, at which time the principal and interest are depleted. The name speaks for itself. Foreign Company: An insurer organized under laws of a state other than the one in which the insurance is written. For example, a company that is domestic to Illinois would be considered to be foreign in all other states. Fraud: An intentional misrepresentation made by a person with intent to gain advantage, and relied upon by a second party that suffers a loss. Fraud is the intent to deceive and can be very hard to prove. General Agent (G.A.): An individual appointed by an insurer to administer its business in a given territory. Responsible for building the agency and service force. Compensation is on a commission override basis. Often called a Managing General Agent (M.G.A). Grace Period: A period of time after premium due date during which a policy remains in force without penalty, even though the premium due has not been paid. If you don t pay your premium on time, the grace period is the 1 st policy provision to apply. Group Contract: A contract of insurance made with an employer or other entity that covers a group of people identified as individuals by reference to their relationship to the entity. A Group contract may be Life insurance, Health insurance, or an Annuity. Group insurance is usually less expensive than individual coverages. Remember, you cannot form a group just to buy insurance. It must exist for some other purpose. Group Life Insurance: Life insurance that a person is eligible to purchase through membership in a group. In an employer group, the employer receives the Master Policy and the employees receive Certificates of insurance. Group Life has a grace period of 31 days and is convertible to individual coverage without a physical exam based upon current age. Guaranteed Insurability: A rider in Life and Health contracts that permits the insured to buy additional prescribed amounts of insurance at prescribed future time intervals without evidence of insurability. Hazard: Any factor tending to make a policyholder a less-desirable risk for the insuring company. A hazard is something that increases the risk. Risk is defined as the chance of loss. For example, smoking is a hazard on both Life & Health insurance. Immediate Annuity: A lump-sum Annuity on which the income payments to the annuitant are to begin at once and continue for the life time of the annuitant. Immediate annuities have no accumulation period. Incontestable Clause: Provides that after the policy has been in force a certain length of time, the company can no longer contest it or void it, except for nonpayment of premiums. The time period is usually two years. In other words, Life & Health policies are contestable for the 1 st two years, and incontestable thereafter. However, Health policies are always contestable for fraud! Indemnity: Insurance is designed to restore the policyholder to the same financial condition enjoyed prior to a loss. The intent is to cover the amount of the actual loss only and to avoid paying amounts that allow an insured to profit from a loss situation. This is known as the Principle of Indemnity. Health insurance follows this concept, but Life insurance doesn t. All Life policies pay in addition to each other! Industrial Life: Life insurance generally with a face amount of less than $1,000, with premiums collected weekly by the producer in person. The grace period for this type of insurance is 28 days. Also known as 6

7 Life & Health Insurance Glossary Home Service Life insurance. There are 3 types of Life insurance: Ordinary (which includes Whole Life, Term and Endowment), Group and Industrial. Insurable Interest: An interest in the life of an individual by which there will be a loss if the insured dies. The interest may be based on either a family relationship or on economic factors. Must exist at the time of application, not necessarily at the time of loss. If you would benefit if a person continues to live, you have an insurable interest in that person. Insurance: A contract or device for the transfer of pure risk to an insurer, who agrees, for a consideration, to indemnify or pay a specified amount for losses suffered by the insured. Risk is defined as the chance or uncertainty of loss. Pure risk is the chance of loss, with no chance for gain. It is the only type of risk that is insurable. Speculative risk, which is the chance for loss or gain, is not insurable. Insurance Age: An age upon which current premium rates may be established. It is commonly based on age at last birthday, age next birthday, or age at nearest birthday. Also known as original age. Insurance Commissioner: Common title for head of a state Department or Division of Insurance. Also known as the Director of Insurance in some states. Insurance is regulated by state law. The Commissioner s job is to protect the insurance buying public by administering state insurance laws and regulations. The Commissioner does not make the laws, he enforces them. Insured: The party to an insurance contract to whom, or on behalf of, the insurance company agrees to indemnify for losses, provide benefits, or render services. In Prepaid Hospital Service plans (HMOs), the insured is called the subscriber. Insurer: The insurance company assuming risk and agreeing to pay claims or provide services. Insurers write indemnity plans, covering the insured. HMOs are not true insurance companies. They write prepaid service plans for their subscribers. Insuring Clause: The clause in a policy that specifies in brief the contract's intent and benefits. Also known as the Insuring Agreement. It specifies the covered perils, such as accident and sickness on Health insurance. A peril is a cause of loss. Interest Option: A Life insurance settlement option under which the insurer keeps the insurance proceeds and invests them on behalf of the beneficiary. The beneficiary receives the interest from the investment. The proceeds remain the property of the beneficiary. The proceeds are not taxable but the interest earned is. Irrevocable Beneficiary: Once elected, cannot be changed without named beneficiary s consent, since they have a vested interest in the policy benefits. A policy loan would also require the consent of the Irrevocable Beneficiary, since if you die with a loan outstanding, they would receive less. Joint Life and Survivor Annuity: Payments are made to two annuitants with the survivor continuing to receive payments after the first annuitant dies. Joint Life Annuity: Payments continue to two annuitants for only as long as both live. Payments stop entirely when the 1 st annuitant dies. There is no survivorship, so monthly payments would actually be higher to the annuitants on a Joint Life Annuity than they would be on a Joint & Survivor Annuity, which pays until the last party dies. 7

8 Jumping Juvenile: Juvenile Life insurance on which the face amount increases by a multiple, usually five, of the original face amount when the insured reaches 21. Used as a marketing tool to sell Life insurance covering children, whose rates are extremely low. Key Person Insurance: Life or Health insurance on important employees whose absence would cause the employer financial loss. The insurance is usually owned by and payable to the employer. Premiums are not tax deductible, but benefits are not taxed. Lapse: Termination of a policy because of failure to pay the premium. A policy lapses at the end of its grace period. For example, if you forget to pay your Whole Life premium when due, there is usually a 30 day grace period, during which time coverage continues until the policy lapses. Law of Large Numbers: An insurance company must protect losses on a homogeneous group. Risks are not usually considered insurable unless the insurer has a large enough base of previous loss experience to be able to accurately predict future losses. It is the Law of Large Numbers that makes accurate predictions of similar risks possible. Life insurance Mortality tables are based on groups of at least 10,000,000 people. Legal Reserve: The amount required as a reserve, to pay claims and benefits, as prescribed by state law as administered by the Insurance Commissioner. Insurance companies must file annual financial reports with the Commissioner proving their solvency. Level Premium Insurance: Life insurance, the premium for which remains at the same level (amount) throughout the life of the policy. For example, on traditional Whole Life, the premium is based upon the insured s original age and it will never change. Level Term Insurance: The amount of insurance protection in a Term policy remains constant during the policy period, which could be 5 years, 10, 20 or even to age 65. For example, on a 5 year Level Term Life insurance policy the face amount and the premium would remain level for 5 years. At renewal at the end of the 5 th year, premiums would increase based upon the next 5 year average age, but the face amount would remain the same. Remember, Term has no cash value and will eventually expire. To be covered, you must die in the term. The word term means time. Term insurance is considered to be temporary. Life Annuity: An Annuity that provides a periodic income to the annuitant during his lifetime. A straight Life Annuity has no beneficiary and is considered to be the most risky type of annuity. The annuitant is betting that he will live a long time, but the insurer is betting he is going to die. Remember, annuities are the opposite of life insurance! Annuities are not subject to underwriting, since there is no insurance protection. Life Annuity with Period Certain: An annuitant will receive payments for a specified number of years (such as 10) or for the rest of her life, whichever is longer. If the annuitant dies before all the guaranteed payments have been made, the beneficiary receives the payments for the rest of the certain period. The period certain is designed to eliminate some of the risk, but the longer the period certain is, the lower the annuitant s monthly payments will be! Life Income Option: A Life insurance Settlement option that provides for payments during the entire life of the payee. Besides Joint and Survivor, there are three methods: Straight Life Income The payee receives a specified income for life, with no refunds upon death. This is considered the most risky option, since there is no beneficiary. Refund Annuity Income is paid for the lifetime of the payee and to a second payee if the first dies before receiving the full proceeds of the policy. This is the least risky option. 8

9 Life & Health Insurance Glossary Life Income with Period Certain The payee receives installments for life with a second payee receiving the payments if the first dies before the end of the time specified in the Period Certain Period. The payee will not receive payments for life, only until the end of the Period Certain, which could be 5 years, 10, 15 or even 20 years, so there is still some risk! Limited Pay Life: A Permanent Whole Life insurance policy on which premiums are paid for a specified number of years or to a specified age of the insured. Protection continues for the entire life of the insured. LP65 and 20-Pay Life are examples. A Life Paid up at age 65 is paid up at age 65, but the cash value does not equal the face amount of the policy until age 100 when the policy reaches maturity. Limited Pay Whole Life is more expensive than traditional Whole Life since the premiums must be paid within a shorter period of time. Loading: The amount added to the cost of mortality (death) to cover the operating expenses of the insurer, such as commissions and the cost of underwriting. Loan Value: That amount of Cash Value in a Whole Life or Endowment policy that may be borrowed by the insured. When you borrow from your policy, the insurer is loaning you their money and keeping your money as collateral. Since they usually have their funds invested, they will charge you annual interest on the loan (maximum 8% in most states). Loans don t have to be paid back while you are alive, but will continue to accrue interest. Upon death, the amount of the unpaid loan plus accrued interest will be subtracted from proceeds. Loss Ratio: The percentage of losses to premiums usually losses incurred to premiums earned. Lump Sum: Proceeds of a policy taken all at once. A single amount. Manual Rates: Insurance rates according to a company Rate Manual that vary from company to company. Also known as Standard Rates. Most rates must be filed with the state Insurance Commissioner, but the insurance companies actually set their own rates in the competitive marketplace. Master Policy: The policy contract issued to the employer under a Group insurance plan. Remember, the employees covered by a group plan are considered to be insureds, but they only receive certificates. Material Misrepresentation: A misrepresentation that would have been important or essential to the underwriter's decision to issue the policy. A misrepresentation is the applicant s failure to tell the truth to the best of their knowledge. MIB: Medical Information Bureau. An organization serving as a clearinghouse of medical information on risks reported to it by insurance companies as a source of underwriting information on applicants. Misrepresentation: The use of written or oral statements of the insured, producer or insurance company misrepresenting the risk, terms, coverage, benefits, privileges or estimated future dividends of any policy. Misstatement of Age Clause: Provides that if misstatement of age is discovered after policy issue, the company can, if the insured is currently alive, adjust the premium amount on future premiums and request payment of the additional premium the policyholder should have paid; or if the insured has died, adjust the face amount of the policy to fit the premium that was paid at the correct age before paying the claim. Mode Premium: Premium paid according to the Mode of Payment selected by the policyholder, that is, monthly, quarterly, semi-annually, or annually. The less frequent the Mode, the lower the annual cost. 9

10 Moral Hazard: A condition of morals or habits that increases the probability of a loss from a peril. Generally, a Moral Hazard is presented by a dishonest person. Mortality Table: A statistical table showing the number of deaths for all ages from 1 to 100. For example, if you are age 30, you could look at the table to find how many people your age will die this year, although the table cannot tell you which ones. Since the table tracks the life expectancies of 10 million people, it is very accurate. The 1980 CSO table is currently used by most companies, although companies (if large enough) are free to develop their own tables. Also known as the Law of Large Numbers. Mortgage Protection Policy: In Life insurance, a decreasing term policy from which the benefits are intended to pay off the balance due on a mortgage upon the death of the insured. Although Credit Life is very similar, in most states, Credit Life is used for consumer loans rather than mortgages. Mutual Insurance Company (Insurer): An incorporated insurance company whose governing body is elected by the policyholders. The policyholders share in the success of the company through possible receipt of dividends. Mutual companies issue participating policies. Dividends are not taxable and may not be guaranteed. Net Cost: Premiums paid minus cash value and any policy dividends paid as of the date the calculation is being made. National Association of Insurance Commissioners (NAIC): An organization made up of all the insurance commissioners of the various states designed to provide a way to exchange information and work toward uniformity of insurance regulation among the states. However, insurance laws are still far from uniform. Noncontributory: Any plan or program of insurance (usually Group) for which the employer pays the entire premium and the employee contributes no part of the premium. 100% participation is required. Non-forfeiture Option: A legal provision whereby the policyholder may take the accumulated cash values in a policy as 1) Reduced Paid-Up Permanent insurance; 2) Extended Term insurance, or 3) Surrender the policy for payment of its cash value, less any outstanding loans. Also known as Guaranteed Values. When surrendering for cash, any amount paid out in excess of premiums paid in is taxable as ordinary income. Once a policy is surrendered for cash, it may not be reinstated. Non-medical: Insurance issued without a medical exam. For example, if the applicant is young and is buying a small amount of Life insurance, no physical exam is required, so coverage may begin immediately. Non-participating: Insurance that does not pay policy dividends to policyholders, which are issued by stock insurance companies. Stock insurers may pay dividends, but if so, they are paid to the stock holders and they are taxable. Nonresident Producer: A producer licensed in a state in which he is not a resident. In most states, no exam is required to obtain a Nonresident license. You simply must prove that you are licensed and in good standing in your home state and pay the required fees. You can only have one resident license, but you can have 49 nonresident licenses, if desired. One-Year Term Dividend Option: A dividend option under which the insured has the company purchase one-year Term insurance with the dividend. For example, your dividend is $100, which you could have taken as cash. Instead, you have the insurer use the money to buy you an additional 1 year term policy at 10

11 Life & Health Insurance Glossary your current age. If you die in the term, your beneficiary will receive the proceeds of your Life policy PLUS the face amount of the one year term policy. At the end of the year, the term policy expires. Ordinary Life Insurance: Life insurance other than Industrial or Group. Ordinary life may be Whole Life, Endowment or Term. The grace period on all Ordinary Life insurance is 30 days. The Mortality Table is used to calculate the rates and benefits payable for Ordinary Life insurance. Original Age: The insured's age when the policy was initially purchased. Often calculated based on the applicant s closest birthday. Paid-Up Additions: Additional single-premium Life insurance paid for by policy dividends and added to the face amount. For example, your mutual insurer declares a $100 dividend, which you could have taken as cash. Instead, you ask them to use the money to buy you an additional Whole life policy, which is paid up to age 100. Although this additional policy is small, no physical exam is required, so this option is very popular with clients who have health problems. Over a period of time, you can obtain substantial additional coverage. Participating (Par): Insurance that pays policy dividends to policy holders. Issued by a Mutual Company. Dividends may never be guaranteed and they are not taxable, since the IRS considers them to be a return of premium already paid. Partnership Insurance: Life or Health insurance sold to a partnership to protect against the loss of business continuity caused by the death or disability of a partner. For example, if your partner dies, his share of the business would go to his spouse who knows nothing about the business. To avoid this, you buy a Life insurance policy on your partner and he buys one on you. If he dies, the money goes to you tax free and you use it to buy out his spouse. A buy/sell agreement should be drafted by a lawyer and signed by all 4 parties: you, your spouse, your partner and his spouse. Payor Benefit: A rider or provision, usually found in Juvenile policies, under which premiums are waived if the Payor of the premium (usually a parent) becomes disabled or dies while the child is still a minor. Permanent Insurance: Whole life insurance is considered to be permanent since it covers you until you die or to age 100, whichever comes first. Term insurance is considered to be temporary. Policy Dividends: The policyholder s share of a company s divisible surplus which may be distributed to policy holders of a Mutual insurer at the discretion of their Board of Directors. Not taxable and not guaranteed. Policy Fee: A special, one-time premium charge to offset in whole or part the insurer s first-year acquisition costs. Policyholder: The person who has the right to exercise the privileges and rights of ownership in the policy contract. Also called the policyowner. Policy Loan: A loan taken by the policyholder from the insurer using the insurance cash value as collateral. Insurers may defer requests for loans or for cash surrender up to six months. Loans are not taxable and need not by repaid, although interest will accrue on an annual basis. Upon death, any outstanding loans plus accrued interest will be subtracted from proceeds paid. Primary Beneficiary: Named beneficiary first to receive proceeds or benefits, if living, when proceeds or benefits are due. Unless revocable, the policyowner may change the primary beneficiary at any time. If 11

12 there is no primary beneficiary, proceeds are payable to the Contingent Beneficiary. If there is neither, proceeds are payable to the estate of the insured, who is considered to be the final beneficiary. Remember, proceeds of a Life insurance policy are not taxable to the beneficiary. Principal Sum: On an AD&D policy, the amount payable in one sum in event of Accidental Death or severe accidental Dismemberment, which is defined as the loss of 2 limbs in the same occurrence. For loss of one limb, an AD&D policy will pay the Capital Sum, which is usually 50% of the Principal Sum. Proof of Loss: A formal statement by the insured to the insurance company regarding a loss. The purpose is to place before the company sufficient information concerning the loss to enable it to determine its liability under the policy. Although both are conditions in a Health insurance policy, don t confuse Notice of Claim (which must be given within 20 days) with Proof of Loss, which must be submitted within 90 days. Rate: The per-unit cost of insurance. Life insurance is rated based on units of $1,000. For example, the rate for Whole life for a 30 year old might by $10 per thousand, so if the applicant buys a $100,000 policy, his premium would be $1,000 a year. The more you buy, the lower the rate per unit. Rated: A policy issued with an extra premium charge because of physical impairment or dangerous hobby. A surcharge added to the rate per unit on Life insurance. For example, the standard rate for a 30 year old buying Whole life might be $10 per thousand, but due to his health, the insurer adds a surcharge of $2 per thousand, so his cost per unit is $12 instead of $10, so his premium for a $100,000 policy is $1,200 instead of $1,000. Rated-Up Policy: A policy issued to an applicant that reflects a higher rate, due to the presence of a greater risk, in the eyes of the underwriter. Rated-up policies often result from substandard health revealed in a medical examination or dangerous hobbies or occupations. See the two definitions immediately above. Rebating: Illegal in most states, rebating involves the payment of something (usually part of the commission) not stated in the policy to the applicant as an inducement to the sale. You can take your client to lunch, but you cannot say I will pay for lunch if you buy this policy from me. Dividends are not considered to be rebates since it is stated in the policy that a dividend might be payable. Reduced Paid-Up Insurance Option: A Life insurance Non-forfeiture option under which the insured uses the cash value of his present policy to purchase a single-premium Whole Life policy, at his attainedage, for a reduced face amount, to age 100. No physical exam is required and the insured may select this option at any time as long as there is a cash value. Reduced-Premium Dividend Option: A Dividend option on a participating life policy under which the policyholder has the dividend applied to the next premium due on the policy and he only has to pay the difference. For example, if the dividend is $100 and the premium is $1,000, than the insured would only have to pay $900. Refund Life Annuity: Provides annuity payments for the annuitant's lifetime with the guarantee that in no event will total income be less than the purchase price of the contract. If the annuitant dies before receiving this amount, the difference is paid to a named beneficiary either as a cash refund or in installments. Reinstatement: When a Life policy lapses at the end of the grace period, the policy holder may apply for reinstatement by paying all back premiums and by passing a physical exam. The main advantage to reinstating rather than buying a new policy, is that the reinstated policy is based upon the insured s original age. However, a policy that has been surrendered for cash may not be reinstated. 12

13 Life & Health Insurance Glossary Reinsurance: Agreement between insurance companies under which one company accepts all or part of the risk of loss of the other. Renewable Term: Term insurance that can be renewed without proof of the insured s insurability, up to a certain specified maximum age. Most Group life insurance is Annual Renewable Term. Individual policies are often written as 5 year, 10, 15 or 20 year renewal term. The face amount is level, but the premiums will go up at renewal, since they are based upon the average age of the insured. Representations: Facts that the applicant represents as true and accurate to the best of his knowledge and belief. Reserve: The amount that, when increased by future premiums on outstanding policies and interest on those premiums, will enable the company to pay future death claims and cash surrenders. Rider: A form attached to a policy that modifies the conditions of the policy by expanding or decreasing its benefits or excluding certain conditions from coverage. Also known as an endorsement. Most riders cost extra, but the additional premium paid does not go towards cash value accumulation. Most riders (such as double indemnity) will drop off a Life policy automatically at age 65. Most riders are added at policy issue, but they may also be added later on with the mutual consent of the parties. Risk: The uncertainty of loss that exists whenever more than one outcome is possible. In the area of Life insurance, death is certain, but time of death is uncertain. Also known as the chance of loss. Remember, only pure risk is insurable. Pure risk is the chance of loss without any chance for gain. Risk Selection: The process of selecting insureds with a normal claims expectancy, also known as underwriting or risk classification. Since most insurance companies are in business to make money, it is the underwriters job to select business that will generate an underwriting profit. Settlement Option: Generally, there are 5 Life insurance Settlement Options: Cash, Interest, Fixed Period, Fixed Amount or the beneficiary may use the proceeds of the policy to purchase an Annuity. Remember, proceeds of a Life policy are tax free. However, if the beneficiary selects the Interest Option, the interest will be taxable. Single-Premium Annuity: An Annuity purchased with one lump-sum payment, generally with after tax dollars. You can buy either a Single Premium Immediate Annuity, which allows you to annuitize right away, or you can buy a Single Premium Deferred Annuity, where you annuitize sometime in the future, perhaps at retirement age. Single-Premium Policy: A Life insurance policy on which the entire premium is paid in one payment, which creates an immediate cash value. Remember, in lieu of a traditional Whole life policy where payments are payable to age 100, you can buy a Limited Pay Whole Life policy, such as a LP 65, a 20 Pay Life or even a 1 Pay life. Universal Life policies were often purchased with a single premium before tax law rules regarding Modified Endowment Contracts (MECs) were adopted. Standard: A risk that meets the same conditions of health, physical condition, and other underwriting criteria used by actuaries when developing rates and benefits from a Mortality or Morbidity Table. The Standard Risk is also known as the Average Risk. Remember, most people are insurable. It is just a matter of classifying them into the proper rating category: Preferred, Standard or Non-Standard. 13

14 Standard Non-forfeiture Law: A law adopted by most states that provides that any cash-value accumulation or its equivalent must be made available to the policyholder should he stop paying the premiums. Any time a cash value Life insurance policy lapses, the policy owner must be given the choice of 3 Non-forfeiture options: Cash Surrender, Reduced Paid Up or the Extended Term option. In other words, the cash value may not be forfeited to the insurer! Standard Risk: A person entitled to life-insurance protection without extra rating or special restrictions. See the definition of Standard above. Stated Amount: Relating to an agreement to pay a specified amount of money to or on behalf of the insured upon the occurrence of a defined loss. For example, the principal sum on an AD&D policy. AD&D and Life insurance are considered to be valued policies, since the amount payable in the event of a claim is determined when the policy is first issued. However, Health insurance follows the Principle of Indemnity, in that the policy will pay the policy limit or the amount of the claim, whichever is less. Stock Insurance Company: An incorporated insurance company with capital divided into shares and owned by the shareholders. Stock companies issue non-participating policies, in that dividends (if declared) are payable to the stockholders rather than to the policyholders, and are taxable. Substandard Risk: A risk not acceptable at standard rates. Also known as a non-standard risk or a rated risk. For example, you apply for Life insurance at standard rates. However, due to a health problem, the insurer declines to insure you. Instead, they make you a counter-offer, agreeing to insure you if you pay a higher premium, or a rate up. You have the option of accepting or declining their counteroffer. Suicide Clause: An exclusion on a Life insurance policy that states that if the insured commits suicide within a specified period of time, the policy will be voided. Paid premiums are usually refunded to the beneficiary as a gesture of sympathy. The time limit is generally two years, except in Colorado where is just 1 year. Surrender: Withdrawing the cash value of a Life policy and surrendering the policy to the insurer. No further coverage exists and the policy may not be reinstated. Cash Surrender is one of the 3 required Nonforfeiture options. A policy may be surrendered for cash at any time. However, amounts received in excess of premiums paid upon cash surrender are taxable. Term Insurance: Life insurance that normally does not have cash accumulation and is issued to remain in force for a specified period of time, following which it is subject to renewal or termination. Term insurance is considered to be temporary coverage. Remember, the word term means time. Term policies only cover you for a period of time and you must die in the term in order to be covered. Whole life, however, is permanent in that it covers you until you die. Tertiary Beneficiary: Next in line behind the Contingent Beneficiary to receive policy proceeds if both the Primary and Contingent Beneficiaries are deceased. Also known as the Final Beneficiary, which is usually the estate of the insured. The word Tertiary means third. Twisting: Inducing a policyholder by misrepresentation to terminate an existing Life policy in order to replace it with a new policy. Producers are naturally tempted to engage in replacement, since the commission paid on new policies generally exceeds the commissions paid on renewal policies. Replacement is not illegal, unless it is detrimental to the client. However, Twisting the facts in order to induce replacement is an illegal and/or unethical trade practice. 14

15 Life & Health Insurance Glossary Unauthorized Company: An insurer not permitted to sell insurance within a state, except for Surplus Lines or Reinsurance companies. All insurers must be authorized, which means they must obtain a Certificate of Authority from the state. However, Surplus Lines companies (such as Lloyds of London) and companies who reinsure other companies are exempt from this requirement. Most states allow Surplus Lines companies (who are unauthorized ) to write the risks that authorized companies won t take. Surplus Lines companies do not participate in the State Guarantee Fund or Association and are generally unregulated as to rates and policy forms used. Underwriter: 1) A salaried company employee trained in evaluating risks and selecting the proper rates and coverages. No license is required. 2) A producer, especially a Life-insurance producer, is considered to be a Field Underwriter or Front Line Underwriter. In theory, the producer is supposed to do some underwriting before submitting the application to the home office underwriter in order to assist in making a decision on the basis of known facts. The producer is required to report all facts known to him or her that might affect the risk. Remember, the producer represents the insurer, not the insured. Underwriting: The process of evaluating a risk for the purpose of issuing insurance coverage. Also known as risk classification. The underwriters job is to select business that fits into the rate structure of the insurer, allowing the insurer to not only pay claims and expenses, but to make an underwriting profit. Unearned Premium: That portion of an advance premium payment that has not yet been used for coverage written. Thus, in the case of an annual premium, at the end of the first month of the premium period, 11 months of the premium would still be unearned. So, if the insurer cancelled a Health policy that had an annual premium of $1,200 after 1 month on a pro-rata basis, they would have to refund $1,100 in unearned premium. Uniform Simultaneous Death Act: A uniform law adopted by most states providing that if the Primary Beneficiary and the insured die in the same accident and there is no proof that the beneficiary outlived the insured, the proceeds are paid as if the Primary Beneficiary died first, which means that the proceeds are paid to the Contingent Beneficiary. Also known as the Common Disaster provision. Variable Annuity: An Annuity contract in which the amount of the periodic benefits varies, usually in relation to the value of securities invested in a separate account, which is very similar to a mutual fund. Producers selling variable annuities or variable life insurance must also pass the NASD Series 6 or 7 exam and be registered with the Securities Exchange Commission (SEC), since securities are regulated by federal law. Further, most states require that producers selling variable products obtain a Variable Products endorsement to their state Life insurance license. Waiver: 1) A rider excluding liability for a stated cause of accident or sickness. Also known as an impairment rider. 2) A provision or rider agreeing to waive premium payment during a period of disability. Also known as Waiver of Premium. 3) The giving up or surrender of a right or privilege that is known to exist. For example, the underwriter has the right to require applicants to complete all the questions on the application. If the underwriter accepts an incomplete application, they have waived the right to obtain it later. Once a right is waived, it can no longer be asserted. This is known as Estoppel. Warranty: A statement made on an application for Property & Casualty insurance that is warranted to be true in all respects. If untrue in any respect, even though the untruth may not have been known to the person giving the warranty, the contract may be voided without regard to the materiality of the statement. Statements on Life and Health insurance applications are, in the absence of fraud, not warranties, but representations. 15

16 War Clause: This generally excludes coverage for persons serving in the armed forces during the time of war, whether on the battlefield or not. Whole Life: A Life policy that runs for the insured's whole life that is, until death or the ultimate age on the mortality table being used (age 100). Premiums for a Whole Life policy may be paid for the whole life or for a limited period (for example, 20-Pay-Life or LP65) during which the higher premium charged pays up the policy. Also known as permanent insurance. 16